Federal Government Employee ISO options/ideas to minimize income and EFC on FAFSA

Paying for College
1

Hi, I’m a Federal Government employee, a single parent and have three children, one of which is a freshman in college-completed a FAFSA last year for this child. I also have a senior in HS that will be going to college next year and need to fill out/update the FAFSA. So next year I will have a sophmore and freshman in college. The third child is just about to enter HS. My question is how to minimize INCOME and thus, lower the EFC. I’m not sure being a fed govt employee has any advantages or options I’m not aware of so I thought I’d ask. I know that adding to TSP(retirement for fed employees like a 401K)will actually increase my EFC so that’s out. Will any of the following effectively reduce my incomes and therefore EFC? Thanks in advance.

  1. reducing exemptions on W4 therefore increasing taxes?
  2. start contributing to FLTCIP(Fed long term care insurance program)?
  3. Anything else?

My freshman in college did take out a loan, federal sub and fed unsub. I paid about $2K towards his tuition, books and costs.

Thanks very much in advance.

2

Is your income big enough to really play with? If you are already getting some sub direct loans for one in school, can you actually afford to offload income in any tax efficient way?

3

Adding to TSP does not increase your income. You make what you make, but contributing to TSP doesn’t change that for the current year. Any amount that your agency matches is not income to you (and you should be contributing to get the maximum match)

Changing the W4 does not change what you make.

Buying insurance does not change your income.

Having the second child in college will change the EFC for both kids, basically cutting it in half.

4

First, thanks for replying, I appreciate it. Do I have alot of discretionary income? No way, about zero. But, the EFC last year was about 10K. I have no money to play with but I’d rather scrape and claw now so that my children won’t have mountains od debt. I just want to make sure I’m minimizing everything.

5

Thanks very much for your reply, I’m grateful for any help. However, and others can feel free to set me straight or agree, when you add to a 401K or TSP in my case, it EFFECTIVELY increase your EFC. The reason is because what you put in a 401K is added back to income on the FAFSA-no many know this. While this alone doesn’t by itself increase EFC, the fact that your contributions are tax free, this effectively adds more to your income for FAFSA purposes. I’m probably not articulatting it very well but increasing your 401K does, in fact, increase your EFC, not by alot but it does.

I really wanted to make sure that TSP is essentially the same as a 401K for FAFSA purposes.

I know that the Govt matching isn’t counted, by the way. Here is an explanation:

“Bad strategy: Shifting income from adjusted gross income to untaxed income”

“For example, increasing contributions to qualified retirement plans (like a 401(k) or IRA) may decrease AGI, but the contributions will be added back in to the total income, counted as untaxed income.”
https://www.edvisors.com/fafsa/secrets/reduce-adjusted-gross-income/

6

While this is true, it doesn’t mean your need based aid will double. The vast vast majority of colleges do not meet full need for all accepted students.

Does your first child attend a college that meets full need? Are you anticipating that the second child will also? Do these colleges use the CSS Profile? If they do, your share won’t be 50% each…it will be about 60% each…of what you have with one kid in college.

The financial gymnastics you listed in your post will do nothing to reduce your income for financial aid purposes.

7

Yes, but adding to the 401k doesn’t increase gross “income.” It changes the AGI.

It’s important to realize college fin aid and the IRS follow some different principles or accommodations. Your pretax contribution isn’t increasing income for FA purposes. It’s extracting that IRS benefit.

In simple math, if you earn 100k and contribute 5k, the AGI may be 95k. But your income is still 100k.

8

No, no, no. Contributing or increasing a contribution to a 401(k) or TSP does NOT increase the EFC. If you have $1,000 of income that you don’t put in a qualified retirement account, FAFSA sees that as $1,000 in reportable income. If you take that same $1,000 and put it in a qualified retirement account (401(k), TSP, etc.), FAFSA still sees it as $1,000 of reportable income for the year that it was earned – no more, no less, no change in EFC. In fact, in years after the contribution, you may see an effective decrease in EFC, because the funds in qualified retirement accounts are not FAFSA reportable assets, which is not the case if you just took the earnings and put it in a regular bank account. And don’t forget the tax advantage you get from putting some (or more) earnings in a retirement account funded with pre-tax dollars. Then there is also the potential for employer matching funds.

9

Thanks. I agree. Having a second child in school doesn’t mean EFC will be half. In fact, I believe it’s the school’s discretion. They don’t have to do jack squat if they are private, I believe.

The son in school is getting what I think is a very good deal because he is an athlete, albeit at D3. However, while I understand D3’s don’t offer athletic scholarships, the coaches, if they want the kid alot, go to admissions and aid folks on behalf of student athlete, and lobby for alot of aid. Without this, the school doesn’t meet 100% need, not even close.

My other son, however, is considering some very good schools, schools that are said to offer 100% need, several without student loans. While I’m not counting on 100%, I think we have a good chance to get an affordable deal. Not many people talk about this but generally speaking, for those in need of aid, if you’re a really smart student your costs can be less because better private schools offer better aid, in general.

10

Don’t mix apples and oranges. There is the FAFSA EFC, and then there is the school calculated EFC. Not same-same.

twoinanddone, can you comment on this?

Lots of people talk about this. Highly selective schools that meet 100% of demonstrated need (as defined by the school) are a common topic of discussion.

11

Thanks again, I appreciate the insight and help, especially clarifying that adding to a 401K won’t increase EFC, or decrease it. The way it was explained to me, although I might have misinterpreted it, EFC would have increased slightly by the tax differences. I’m glad to know it doesn’t.

There might be alot of discussion in here regarding what seems to be a direct relationship between student performance in HS and financial aid but outside of this forum, not so much. In fact, I would think this might be something politicians might try to exploit but I’m not hearing this.

12

Huh? The financial aid advantage (both merit aid and need-based aid) that is available to students with great academic credentials and high standardized test scores is well known and widely discussed in all sorts of places.

13

Your FAFSA EFC will be half. You are not guaranteed more aid from the colleges, however.

I will also comment about your athlete son getting “more aid”. @twoinanddone can comment as well. IIRC, schools that do not give need based aid cannot treat athletes differently than other students for need amount purposes. They might preferentially package giving more grants than loans…but I don’t think they can give you a significant bump in need based aid that others would not be able to receive.

I agree with @BelknapPoint . The most common thing you will see discussed is the acceptance rates at these schools. Many are in the single digits, others less than 20%. Lets just say…their generous aid isn’t available unless your kid gets accepted…and the chances of that are not in anyone’s favor with 80% or more of applicants getting rejected each year.

One thing you should be looking for is places where your second kid could garner significant merit aid. If he really has the stats to be a competitive applicant for elite schools that meet 100% of need, then he would likely be a strong candidate for merit aid some places too. Merit aid won’t take your income into consideration…at all. And when kid 1 graduates, your merit aid will be the same and won’t go way down like it will with need based aid at most colleges.

14

OP, I think you’re broadly confused about the process. Maybe try a book like Financial Aid for Dummies or How to Pay for College Without Going Broke.

The very first principle in aid is: colleges give according to their policies (of course, their wealth,) and not all are created equal, in that respect. Your EFC could be cut to 60% per child, but some colleges give lousy aid or a pittance, in the first place. Or have other considerations. The UCs, eg, don’t support out of state kids. BU is known for being unpredictable, etc.

And this isn’t about private colleges not doing squat. It depends on the school. In fact, many publics are less supportive, their resources are tighter. Or fin aid pref goes to instate kids.

Coaches can suggest a kid needs a good package, but they can’t influence that at a “Meets Full Need” only college. That’s a fomula based calculation.

“seems to be a direct relationship between student performance in HS and financial aid” Not exactly.

Top students the college wants are more than stats. If a college is MFN, they get what their own formulas show, per policy, not an extra sum. At Merit colleges (where special scholarsips apply for hs performance,) yes, they can lure kids with $. But those aren’t MFN, they may offer low scholarships or large, it may be great or not.

And “the fact that your contributions are tax free, this effectively adds more to your income for FAFSA purposes.” Not quite. I’d word it this:

“The fact that your 401k contributions are subtracted from income by the IRS doesn’t change the gross income number for FA consideration.” Nothing is “added” to income. It’s added back into AGI.

There are other considerations in how the CSS Profile looks at income, assets and fin stabilty. But let’s get the basics first.

edited to fix an error, AGI word choice.

15

This is not true and a direct violation of the NCAA rules. No student athlete at a D3 school is getting more than a non-athlete at the school. The NCAA even watches to make sure athletes aren’t getting more SEOG money or more (or better jobs) work study money. Your son can quit playing tomorrow and he’d get the same FA from that school.

The coach can make sure that student is getting every single cent he’s entitled to, but no more. The coach can make sure that the athlete knows about a certain grant but that grant has to be available to all students in the same financial position, or gpa, or test scores, or whatever the qualifications are for that grant. Some of the top schools have a policy of ‘reexamining’ their aid if another peer school offers more, and that does seem to happen more with athletes, but the policy has to be applied to ALL applicants, so the computer nerd gets the same review as the quarterback.

Being an athlete can (and does) help with admissions, but not with FA at a D3 school.

16

If you have a FAFSA EFC of $10k with one in college, the best you can hope for is having a FAFSA EFC of about $5k per student in college next year.

That will barely qualify them for a Pell Grant.

Depending on whether your state has a grant program and state grant eligibility criteria, they might qualify for that.

I assume your oldest attends locally or has merit aid in addition to student loans and what you contribute?

The younger siblings should be looking for merit or instate opportunities as well.

You might qualify for AOTC American Opportunity Tax Credit. Look into income limit. I think it looks at your MAGI.

https://www.irs.gov/credits-deductions/individuals/aotc

You also should make sure that your oldest doesn’t provide more than 50% of his own support with his loans.

That can affect whether you can claim him as a dependent for tax purposes and as a member of the household and a student in college for his sibling’s FAFSA.

17

You used 2017 income on last year’s FAFSA and will use 2018 on this year’s FAFSA, 2019 is almost over, so only 2020 and 2021 income will matter for one or two years for the two college students as far as aid calculation goes.

Since they probably will still not qualify for Pell Grant, and acceptance at meets full need schools is very selective, make sure you have the second oldest apply to high merit schools as well.

Also run net price calculator on the schools’ websites to see how much aid they might offer with your income assets and two in college. Also see how much aid will be reduced for the last year with one in college.

The CSS profile schools might also look at home equity and what you are paying for the older sibling’s education.

The net price will be much higher than FAFSA EFC most likely.

18

Your FAFSA EFC will be half for each student, if all is equal in finances for each kid. That does not mean your first child will necessarily get more aid from his school.

First of all, is your oldest getting full need met, and is he at a school that uses FAFSA only to determine need? A question you should ask the financial aid office is whether they will increase his aid in accordance to his EFC which will be effectively halved with a sibling in college. A school that does not guarantee to meet full need, may well not increase the aid package when the EFC goes down. They often will just give whatever increases that can come from state and federal entitlements. For example, your son in college might now become eligible for PELL if your EFC is halved to $5k this year. Your state might have need grants that might come into play too. Whether the college will kick in some of their own money so that all you have to pay is EFC, remains to be seen. That’s the question to pose to that FA Officer.

Because you do not mention CSS PROFILE, I’m assuming that your son in college right now doesn’t need to fill that additional financial aid form. CSS PROFILE schools do NOT simply halve the their Institutional EFCs in half when there are two students in college. They apply 60% to the number which is often NOT the same as the EFC anyway. Assuming just for this instant that it is, and you get that same FAFSA EFC of $10k on PROFILE (unlikely), that second child’s EFC at a PROFILE school would get a $6k institution EFC.

The schools that guarantee to meet full need tend to do so, defining their own need. This is where your retirement funds might come into the picture, not because you contribute to them that year or not, but because PROFILE asks what’s in that pension pot, and some PROFILE schools do use that information in determine aid, something FAFSA does not do. PROFILE also asks for primary home value, what car you drive and other probing questions.

I suggest playing with some Net Price Calculators on specific college websites of the schools your second child is considering to see what they expect you to pay.

Depending upon your second child’s basic stats (test scores and gpa), he may qualify for merit money. However, unless he gets enough scholarship money that it covers the EFC, it will likely replace the financial aid. I suggest playing with the Fordham NPC as it does have guaranteed merit built into it.

Two schools that I know off hand that meet full need according to FAFSA EFC are UChicago, which is highly selective and Albright College in PA . Depending upon your second child’s stats, he could well be in the market for merit money but getting a full ride is truly a lottery ticket.

It’s going to be difficult, IMO, for you to get packages for your two in college that will only require you to pay your FAFSA EFC. Most schools go up in cost, and also expect students to contribute more as they move up the ranks.

As for being a D3 Student athlete, from what I have seen there are some financial perks. There may be awards given by organizations outside the school, there might be a better chance of getting full EFC met. Also, I noticed that athletes tend to get the jobs at the gym or at other sporting events. My son was a D3 athlete, who got a small outside award, but referred to by the college, and worked at the gym and at sporting events for extra money. Though the financial aid packages did not exceed EFCs at the school for athletes, the athletes did tend to get their need met, which was not the case for the majority of the students there, as the school did not guarantee to meet full need. In any case, one cannot depend upon this, though I would talk to the coach about work opportunities for your athlete son and if he would also drop a line about the increase in need that will be occurring with a second child going to college.

Other than taking a wage cut, I don’t see a way to reduce your Income, which is key in EFC calculations. You can, however watch your kids’ assets and your on the day you file FAFSA and PROFILE (if necessary) Its a very good time for your kids to pay off any obligations to you or that they may have, since sitting assets for students get hit at 20% as opposed to parental assets at 6%, and they get no allowance as parents do. You also might want to make sure it’s not payday for you when you fill out that amount and that you don’t have earmarked money sitting there. We had a rather large insurance payment in our accounts this summer from damage to the basement that was every bit and then some used when the work was done. That can do some damage to your EFC.

19

“No, no, no. Contributing or increasing a contribution to a 401(k) or TSP does NOT increase the EFC. If you have $1,000 of income that you don’t put in a qualified retirement account, FAFSA sees that as $1,000 in reportable income. If you take that same $1,000 and put it in a qualified retirement account (401(k), TSP, etc.), FAFSA still sees it as $1,000 of reportable income for the year that it was earned – no more, no less, no change in EFC.“

I’m surprised to find myself disagreeing with @BelknapPoint but what’s missing here is that the federal tax actually paid is deducted from the reportable income in the EFC calculation. No tax payable on retirement contributions means a smaller deduction from the EFC.

In the private sector this means that redirecting retirement contributions from a regular 401(K) to a Roth 401(K) is a good idea to reduce the subsequent EFC. Is there an equivalent option for government employees?

20

If you contribute $10k to your pension, and are in the 10% tax bracket, you pay $1000 less in taxes for a net gain of $1000 in your pocket

For FAFSA purposes, your EFC would not be affected by the contribution , as it is added back into your income. However, you report $1000 less in taxes owed.

At very MOST, EFC is 47% of parental income, so that $1000 can result in $470 more on the EFC.

However the parent saves $1000 in taxes. So net saved is $530 vs just not contributing to Pension and getting $470 less in EFC.

So, it’s a wash, pretty much. Doubt OP is at 47% of income on EFC, also doubt he’s just at 10% marginal tax bracket.